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Free trade agreements

Crunch time for CPTPP

Published 18 July 2023

CPTPP Ministers gathered in Auckland for their annual Commission meeting this past weekend. Aside from welcoming the UK as its latest joiner, members geared up to address a range of issues before them, thorniest among which is the large number of aspirant economies now lining up to join, notably including China and Taiwan. How will the world’s most ambitious free trade agreement fare?

When APEC Trade Ministers gathered for their annual meeting in Detroit in May, there was a side meeting to which the United States, as APEC’s Chair this year, could not be invited. That meeting was convened by New Zealand as the current Chair of the Ministerial Commission of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and brought together the agreement’s 11 signatories. Though this might not have troubled them unduly, the US was left looking in from the outside, highlighting Donald Trump’s unfortunate decision in January 2017 to leave the Trans-Pacific Partnership, CPTPP’s predecessor agreement, which it brokered and co-founded in 2016.

On 15-16 July, CPTPP Ministers again gathered, this time in Auckland, for their annual Ministerial Commission. Ministers had before them a number of thorny issues to discuss, including welcoming the United Kingdom as CPTPP’s 12th member, commissioning a broad review of the agreement, and discussing how to manage the large number of aspirant economies now lining up to join the free trade agreement. In a world where trade liberalization is becoming politically toxic among many democratic electorates, CPTPP still stands as an ambitious and high-quality instrument. How the process of its expansion and deepening is handled will determine how useful the agreement remains.

From humble beginnings

From the very beginning, the CPTPP’s vision has been about the more open economies in APEC coming together to set a new standard for economic integration in the region. Notions of the “Asia pivot,” much vaunted by the Obama administration, came much later. The TPP was not originally an American idea: rather, the concept grew from more humble origins with four economies at the outset in 2005 (New Zealand, Singapore, Chile, and Brunei, known as “P4”.) The founders always had their sights on including the US. Parts of the agreement envisioned by P4, notably in financial services, were deliberately left uncompleted. In 2008, the US under the Bush Administration was persuaded to join. By the time the TPP was signed in Auckland in February 2016, there were 12 members including Australia, Canada, Japan, Malaysia, Mexico, Peru, and Vietnam. Despite the reversal of January 2017 when the Trump Administration abruptly withdrew, the remaining 11 signatories persevered to bring CPTPP into effect as an “open plurilateral.” This means that accession is available to any economy willing and able to meet CPTPP’s high standards, including in both market access and forward-looking trade rules.

CPTPP is particularly attractive from a business perspective, including as a means to eliminate costly barriers to trade and investment for goods and services, both at and behind the border, to promote regulatory coherence and ease of doing business as well as to address sustainability and other stakeholder concerns. The broader vision of CPTPP is as a pathway to the lofty goal of a Free Trade Area of the Asia-Pacific (FTAAP), originally mooted by the APEC Business Advisory Council (ABAC) in 2004 and still very much a part of APEC’s Putrajaya Vision 2040, a blueprint for APEC priorities to modernize over the next near-two decades.

Changed circumstances

In the period since the TPP, many other plurilateral FTAs have been concluded. The Regional Comprehensive Economic Partnership (RCEP), led by ASEAN (and not China as is often claimed), is now fully in effect as the world’s largest FTA, albeit with provisions that are not generally as ambitious as CPTPP. In the Americas, NAFTA was replaced in 2020 by USMCA (US-Mexico-Canada Agreement), ironically largely built on TPP. Today, enthusiasm for freer trade appears to be waning among key voters and policymakers of major economies worldwide. The world is turning increasingly inward as notions of “strategic autonomy,” protectionism, and its sidekick “industrial policy” have taken hold. The US has not signed a free trade agreement for some years now and is lukewarm at best about multilateral trade rules. Instead, the US is championing the Indo-Pacific Economic Framework (IPEF) as a new, non-binding model for economic cooperation, but without offering market access.

Business practices have also continued to evolve. The pandemic has shortened global value chains. The digital economy has continued to advance. While CPTPP is now in operation for all 11 founding members, this has been a slow process. Economies have been slow to implement all CPTPP requirements. The pandemic has frustrated progress with CPTPP’s built-in work program. The agreement is in need of updating and expanding to maintain both its relevance and its cutting edge.

Yet at the same time, the list of economies wanting to accede to CPTPP has never been longer. The conclusion of negotiations for the UK’s accession was announced in May. China, Taiwan, Ecuador, Costa Rica, Uruguay, and now Ukraine have also deposited formal requests for accession. Dealing with these applications in a reasonable timeframe is no easy matter, especially when the agreement, unwisely, has no standing secretariat but relies on resources contributed by member economies.

To expand or not

China’s application is likely to raise questions for a number of CPTPP members, particularly at a time of heightened geopolitical tension. There can be little doubt that the Chinese application is a serious one and not, as some would have it, a maneuver to throw a spanner in CPTPP’s works. China is seeking new markets for expanding production. China says it is committed to ongoing reform and opening up of its economy and this is a way of demonstrating this commitment. In recent weeks, China has started to more actively prepare for accession by moving to prohibit the transfer of software source code, though this notably will apply only within the mainland’s free trade zones. This is also seen as assisting China’s application for membership in the Digital Economy Partnership Agreement (DEPA), a highly advanced deal among Chile, New Zealand, Singapore and now South Korea to improve governance over the fast-growing digital sector.

Even so, difficulties over China’s CPTPP accession are foreseen in areas such as Chinese state-owned enterprises, subsidies, intellectual property, and other aspects of digital governance as well as labor and environmental issues. China can be expected to be a tough negotiator. It will be conscious too of the flexibilities given to Vietnam in some areas. One area where it can offer advantages to CPTPP members with which it does not already share FTAs is market access. CPTPP members may be attracted to this and to the bigger picture of embedding China, as the world’s second-largest economy, more firmly into their leading framework of trade rules in the region.

China’s application may be challenging but, in this, it is not alone. Managing Taiwan’s application at the height of geopolitical tension in the Taiwan Strait will be a delicate exercise. Taipei has every right to seek accession: New Zealand for example has enjoyed excellent FTAs with both China and Taiwan.1

Ecuador and Costa Rica are newcomers to Asia-Pacific trade diplomacy. Uruguay’s application is more complex since it is a member of the Southern Common Market, known by its Spanish abbreviation MERCOSUR. Ukraine’s interest introduces a different type of political complexity: negotiating a trade agreement with an economy in the middle of a war will be anything but straightforward. Whether the US might one day seek to re-join the earlier TPP or CPTPP or propose something else, like an expanded USMCA, need not have taken up much time at the Auckland CPTPP Ministerial - there is little appetite for this in Washington in the medium term.

Ministers clearly had a lot on their plate in Auckland. Outstanding issues are unlikely to have been fully resolved, apart from the formal accession of the UK. The best outcome would have been an agreement to move forward with the processes already established in CPTPP’s Accessions Protocol. This requires the process to be initiated “within a reasonable period of time” of receipt of the application and for accession, working parties to be established in close consultation with the aspirants. The Protocol also establishes indicative timelines, although these do not appear to have been strictly followed in the case of the UK.

It is understandable that these things take time, but that is all the more reason to begin the process if only to provide encouragement to those in the waiting room, and to attract others like South Korea, the Philippines, and Thailand, which are still considering whether to join the party. But jumpstarting the accessions process appears to have been too audacious a step in Auckland where Ministers prioritized a wider review of other aspects of the agreement. There is a risk that a lengthy review will add more delay. That will be regrettable for businesses in the region which in the aftermath of the pandemic are looking for new generators of business growth.

Competitive liberalization

It’s often the case that nothing encourages trade liberalization than the thought that others might get ahead. That’s an argument for setting up competitive accession processes within CPTPP by which those who are prepared to do more to meet the standards can get the green light more rapidly. Unfortunately, the political reality does not favor this outcome as the whole process is subject to consensus amongst existing members.

CPTPP however is far from the only game in town. The first best option for trade liberalization is always multilateral, through the World Trade Organization (WTO), which continues to play a crucial role in underpinning global trade rules. While the WTO made some progress at its last Ministerial, for example in the area of fishery subsidies, the organization remains seriously weakened by the lack of consensus around the future of its dispute settlement system.

Then there are bilateral and other plurilateral agreements. The former set continues to be made, though at a reduced pace and with varying levels of ambition. They add to the noodle bowl of existing agreements and can be confusing to businesses. As for the latter, RCEP is now in operation for all its 15 members but progress in establishing a secretariat and getting the machinery of working committees moving have been slow. IPEF has delivered a surprising early harvest in its Supply Chain Pillar, also announced at APEC in Detroit, but the terms are light on binding commitments and heavy on consultative committees. The pillar is bold in scope, but there is skepticism at this stage about whether it can be made to work. In comparison with these other options, CPTPP offers a more compelling and enforceable vision for businesses which is precisely why, from such humble beginnings, the enterprise has weathered even the US withdrawal.

In Auckland, the challenge was to deliver some clear signals on the future direction of CPTPP to keep the flame of trade liberalization alive and provide a basis for an improved business environment in the Asia-Pacific. CPTPP has always been about a big idea – freer trade and investment under better trade rules can provide impetus to economic integration, sustainable global growth, and development. CPTPP needs to remain a big tent with room for all who are prepared to subscribe to its high standards, with ultimately as few players as possible left looking in from the outside.

[1] New Zealand’s Agreement on Economic Cooperation is with the separate customs territories of Taiwan, Penghu, Kinmen, and Matsu

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Stephen Jacobi is Executive Director of the New Zealand International Business Forum. Stephen had extensive diplomatic, trade and government experience including posts as Deputy High Commissioner in Ottawa, Assistant Trade Commissioner in Paris and adviser on trade and diplomatic issues with the Ministry of Foreign Affairs and Trade.

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